Markets will be paying close attention to whatever comes out of Jackson Hole, Wyo., where Fed vice-chair Stanley Fischer is scheduled to speak about inflation on August. 29.
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On Monday, that official, Federal Reserve Bank of Atlanta President Dennis Lockhart, said the Fed is still likely to raise rates “sometime this year.”
That could change, however, if the global and U.S. economic situation does, said William Dudley at a conference on the regional economy.
But China’s slowdown is weighing on economies across the world.
Generally, the short-term reaction to any dovish talk out of the Fed is positive for the stock market but is this a psychological phenomenon or something that is backed up by actual market returns?
Still, he emphasized that the current turmoil is dissimilar to the financial crisis of 2008 because the genesis of the the crash is overseas, not in the U.S., so “we have to assess” how those global developments could hurt domestic growth. Lockhart declined to say if he favored moving in September or delaying.
The devaluation only served to underscore another worry Fed policymakers voiced in the July meeting: That raising the fed funds rate would exacerbate the strength of the US dollar “extending the downward pressure on commodity prices and the weakness in net exports”. The probability of a September rate hike has been cut in half in less than three weeks. This year’s remaining meetings are scheduled in October and December. Dudley said he hoped that would still be the case.
The recent plunge in US and global markets in response China’s slowdown prompted many economists to push back their forecasts for an initial rate hike to later this year or even 2016. “Let’s see how the data unfold before we make any statements about exactly when that might occur”. It will highlight how and why does the Fed need to do more to start rooting out the income inequality problem.
Dudley said a final decision would reflect how the market acts over the next few weeks, as well as the end-of-month economic data. “Certainly, improvements in the Chinese economy will be welcomed”.
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While the Federal Reserve previous year ended its large-scale bond-purchasing scheme known as quantitative easing, which saw it pump more than $3 trillion dollars into the stagnant economy, it has kept the near-zero benchmark interest rate over concerns that growth, wages and labor market conditions have not been sufficient on their own. The market gauge of those expectations – the yield spread between 10-year Treasuries and 10-year Treasury Inflation Protected Securities – hit a seven-month low on Monday, suggesting investors see inflation of around 1.5 percent over the next decade, well below the Fed’s 2 percent target. And as he had indicated during a recent stop in Rochester, Dudley again said that he feels Rochester’s economy is more diverse and dynamic than ever before.
